After $200M patent settlement with Microsoft, VirnetX sues for more

Microsoft gets sued by a patent holder with a track record of big wins.

A patent-holding company that already won a $200 million patent settlement from Microsoft in 2010 is going after the software giant again. Yesterday, VirnetX filed suit in the East Texas judicial district that it favors, seeking another patent win against Redmond.

This new lawsuit (PDF) asserts six patents that are alleged to cover Skype (which Microsoft purchased in 2011) as well as Microsoft products that may integrate Skype, like Lync, Microsoft's instant-messaging platform. The suit says the infringement is willful because Microsoft should have known about these patents due to VirnetX's earlier lawsuit and the license agreement it ultimately struck.

A March 2010 jury trial against Microsoft resulted in a $105.7 million verdict, and VirnetX was asking for an injunction as well. Two months after the verdict, Microsoft settled the litigation for $200 million. But VirnetX now notes that the license "was explicitly limited in scope, and Microsoft is not licensed to practice VirnetX's technology in certain excluded ways, particularly across non-Windows platforms."

VirnetX gets all its income from licensing patents. So although it talks about offering services, the company generally meets the standard of do-nothing patent-holding companies often called "patent trolls." The publicly traded company has 14 employees, and its corporate headquarters is a suite in a small office building in Zephyr Cove, Nevada, which it leases for $5 per month.

The company is experiencing an up-and-down year in the courts so far. In November, it won a $368 million verdict against Apple—and then immediately filed another lawsuit against Apple. That case has resulted in Apple changing how iOS devices use VPN. In a more recent case against Cisco, VirnetX lost, and its stock has gone down nearly 50 percent since then.

Why are the patent trolls allowed to always file in the "favorable" district of East Texas? Shouldn't they have to sue in the jurisdiction where the alleged infringement took place, i.e. wherever the HQ is located?

I'll bet my bottom dollar that there are fewer than 4 judges that keep this "Eastern District" such a patent-friendly venue for trolls. Let's pray for early retirement for that cabal. Or maybe something less polite.

Dear Ars, please for future patent troll articles, can you please stop using the shell company names and instead use the full name of whichever lawyer is behind that shell company?

Unfortunately your request simply makes no sense in most instances.

First, in the specific instance of VirtnetX, you are dealing with a publically traded company. The people behind the "shell company" in this instance are normal stock holders.

Second, speaking as an attorney who defends tech companies in litigation against patent trolls, the companies are rarely owned or backed by the lawyers litigating the suit. There are plaintiff-side patent litigation firms but they represent many different companies in concurrent litigation just like any law firm does. The attorneys involved did not apply for the patents nor did they create the patent troll, and in some cases they are not even bankrolling the operation.

Finally, even if we adopt your suggestion, who should be named? The lead trial counsel? The other partners assisting her? The likely 3+ associate just out of law school assisting them? The local counsel in E.D. Tex. who is likely doing little or nothing on the case? All of them are profiting from the litigation, but which is responsible?

While the question of who is financially benefitting from the current patent enforcement regime is a legitimate policy concern, it is not nearly as simple as which lawyers are representing the troll.

Dear Ars, please for future patent troll articles, can you please stop using the shell company names and instead use the full name of whichever lawyer is behind that shell company?

Unfortunately your request simply makes no sense in most instances.

First, in the specific instance of VirtnetX, you are dealing with a publically traded company. The people behind the "shell company" in this instance are normal stock holders.

Second, speaking as an attorney who defends tech companies in litigation against patent trolls, the companies are rarely owned or backed by the lawyers litigating the suit. There are plaintiff-side patent litigation firms but they represent many different companies in concurrent litigation just like any law firm does. The attorneys involved did not apply for the patents nor did they create the patent troll, and in some cases they are not even bankrolling the operation.

Finally, even if we adopt your suggestion, who should be named? The lead trial counsel? The other partners assisting her? The likely 3+ associate just out of law school assisting them? The local counsel in E.D. Tex. who is likely doing little or nothing on the case? All of them are profiting from the litigation, but which is responsible?

While the question of who is financially benefitting from the current patent enforcement regime is a legitimate policy concern, it is not nearly as simple as which lawyers are representing the troll.

Well, he's talking about many of the patent troll "corporations" who are in fact started up and run by patent lawyers. Being a new poster, maybe you didn't realize this. It's an ongoing issue Ars has been covering for years.

If the allegedly infringing product is available for sale in a particular district, and customers use it there, then the district sadly has jurisdiction, since infringement is 'occurring' there.

The obvious solution is to put a clause in your software TOS that it may not be used, sold, or distributed to anywhere in Texas. Then when you get sued in that district, file a DMCA claim and move to dismiss the suit with prejudice.

Dear Ars, please for future patent troll articles, can you please stop using the shell company names and instead use the full name of whichever lawyer is behind that shell company?

Unfortunately your request simply makes no sense in most instances.

First, in the specific instance of VirtnetX, you are dealing with a publically traded company. The people behind the "shell company" in this instance are normal stock holders.

Second, speaking as an attorney who defends tech companies in litigation against patent trolls, the companies are rarely owned or backed by the lawyers litigating the suit. There are plaintiff-side patent litigation firms but they represent many different companies in concurrent litigation just like any law firm does. The attorneys involved did not apply for the patents nor did they create the patent troll, and in some cases they are not even bankrolling the operation.

Finally, even if we adopt your suggestion, who should be named? The lead trial counsel? The other partners assisting her? The likely 3+ associate just out of law school assisting them? The local counsel in E.D. Tex. who is likely doing little or nothing on the case? All of them are profiting from the litigation, but which is responsible?

While the question of who is financially benefitting from the current patent enforcement regime is a legitimate policy concern, it is not nearly as simple as which lawyers are representing the troll.

Well, he's talking about many of the patent troll "corporations" who are in fact started up and run by patent lawyers. Being a new poster, maybe you didn't realize this. It's an ongoing issue Ars has been covering for years.

Exactly. This particular company may have some employees and is publically traded. Most patent trolls are just one sleazebag hiding behind an incorporation.

If the allegedly infringing product is available for sale in a particular district, and customers use it there, then the district sadly has jurisdiction, since infringement is 'occurring' there.

The obvious solution is to put a clause in your software TOS that it may not be used, sold, or distributed to anywhere in Texas. Then when you get sued in that district, file a DMCA claim and move to dismiss the suit with prejudice.

If the allegedly infringing product is available for sale in a particular district, and customers use it there, then the district sadly has jurisdiction, since infringement is 'occurring' there.

The obvious solution is to put a clause in your software TOS that it may not be used, sold, or distributed to anywhere in Texas. Then when you get sued in that district, file a DMCA claim and move to dismiss the suit with prejudice.

Why are the patent trolls allowed to always file in the "favorable" district of East Texas? Shouldn't they have to sue in the jurisdiction where the alleged infringement took place, i.e. wherever the HQ is located?

Its the wonders of the US legal system. Why different states are allowed to have different patent and company law is a mystery. I take it East Texas is not bothered about this.

A simple solution for tech companies to avoid the East Texas courts, is to simply put a clause in their license agreement that bans the sale and use of their products in East Texas. This would include Windows, OSX, most phones, computers and so on.

I mean, East Texas is not that big of a market, and they would probably loose less on not selling a single product there, than they do now defending themselves from patent trolls.

Why are the patent trolls allowed to always file in the "favorable" district of East Texas? Shouldn't they have to sue in the jurisdiction where the alleged infringement took place, i.e. wherever the HQ is located?

It has nothing to do with "how different states are allowed to have different patent and company law", as another comment mentioned, as the courts there aren't making up or using different laws (the basis of patents are part of Article One, Section 8(8) of the Constitution). It essentially has everything to do with the speed of the cases and that the judges there are "very friendly to patent plaintiffs and unfriendly to patent defendants".

A short "why":

Quote:

East Texas has other qualities that have made it perennially attractive to patent-holders. Most importantly, defendants are very unlikely to win a case on summary judgment, as judges in the district are much more likely to find that it's appropriate for juries to rule on patent issues. That dramatically raises the cost, and risk, for defendants.

And those trials tend to be short, as it can be tough to put on an effective defense, especially with multiple defendants. Trials are often over within a week; the invalidity trial over the Eolas patent, a case with the potential to affect the future of the whole Web, took place in all of four days.

A short "how":

Quote:

US federal courts are divided into 94 districts. When patent-holders file a lawsuit against a product that's sold nationwide, they have pretty wide leeway as to where to file their case. That's allowed for quite a bit of "venue shopping" in patent cases, and several years ago the remote and rural Eastern District of Texas started to become surprisingly popular.

Over time, East Texas became known as a place very friendly to patent plaintiffs and unfriendly to patent defendants, particularly out-of-state or foreign tech companies. Judges there were reluctant to let cases be transferred out of their district, and some patent-holding companies began setting up Texas LLCs in order to better argue that Texas was the right venue for them.

Many of those companies are "headquartered" in small offices in the building next door to the federal courthouse in Marshall; or they're in the Energy Center in Tyler, a historic but generic-looking office building that once housed Exxon's local offices back in Texas' oil heyday.

VirnetX seems to be trading with a market capitalization of just under $1B. How many $200MM judgements does it take before Microsoft looks to just buy the company (and presumably starts to rake in licence fees of their own on the back of all the newly acquired patents)?

VirnetX seems to be trading with a market capitalization of just under $1B. How many $200MM judgements does it take before Microsoft looks to just buy the company (and presumably starts to rake in licence fees of their own on the back of all the newly acquired patents)?

Why would the company just sell itself? They can make more being themselves suing everyone.

VirnetX seems to be trading with a market capitalization of just under $1B. How many $200MM judgements does it take before Microsoft looks to just buy the company (and presumably starts to rake in licence fees of their own on the back of all the newly acquired patents)?

Why would the company just sell itself? They can make more being themselves suing everyone.

That argument never makes any sense to me.

That's the beauty of a publicly traded company... anyone can buy the available shares. I'm no expert (and there are disclosure rules, a limited number of total shares available, etc.), but Microsoft could go to Wall Street, buy 50.1% of the company, crown itself king and stop the lawsuit.

On a different note, one of the directors of the company is named Michael Angelo. For some reason that name sounds familiar...

Why are the patent trolls allowed to always file in the "favorable" district of East Texas? Shouldn't they have to sue in the jurisdiction where the alleged infringement took place, i.e. wherever the HQ is located?

Its the wonders of the US legal system. Why different states are allowed to have different patent and company law is a mystery. I take it East Texas is not bothered about this.

It is a federal court based in East Texas. Being a federal court, the ruling will apply to the U.S. as a whole...

VirnetX seems to be trading with a market capitalization of just under $1B. How many $200MM judgements does it take before Microsoft looks to just buy the company (and presumably starts to rake in licence fees of their own on the back of all the newly acquired patents)?

Why would the company just sell itself? They can make more being themselves suing everyone.

That argument never makes any sense to me.

They are publicly traded, the board cannot do anything if there is a successful proxy fight, has they would then be replaced by a by a board willing to accept the takeover. =p

I hope these companies continue to attack Microsoft and every other company that supports the software patents. I hope they get caught up in so many software patent lawsuits that they post loss after loss until one day these companies wake up and stop supporting a system that discourages innovation and technological advancement.

VirnetX seems to be trading with a market capitalization of just under $1B. How many $200MM judgements does it take before Microsoft looks to just buy the company (and presumably starts to rake in licence fees of their own on the back of all the newly acquired patents)?

Why would the company just sell itself? They can make more being themselves suing everyone.

That argument never makes any sense to me.

That's the beauty of a publicly traded company... anyone can buy the available shares. I'm no expert (and there are disclosure rules, a limited number of total shares available, etc.), but Microsoft could go to Wall Street, buy 50.1% of the company, crown itself king and stop the lawsuit.

On a different note, one of the directors of the company is named Michael Angelo. For some reason that name sounds familiar...

Provided that they are available, though... it's pretty common for the controlling interests to hold a majority of stock personally to prevent exactly these sorts of hostile takeovers.

Thanks for the replies to my earlier question. It seems to me, though, that the infringement would have taken place at the location where the infringing product was engineered and/or produced, and not at the point of sale.

Of course, according to people like this guy, we're all infringing one patent or another every day!

Why are the patent trolls allowed to always file in the "favorable" district of East Texas? Shouldn't they have to sue in the jurisdiction where the alleged infringement took place, i.e. wherever the HQ is located?

Its the wonders of the US legal system. Why different states are allowed to have different patent and company law is a mystery. I take it East Texas is not bothered about this.

It is a federal court based in East Texas. Being a federal court, the ruling will apply to the U.S. as a whole...

That is unequivocally not true. It will apply to that district court. Different districts are allowed to have conflicting rulings, in which case the trial will be appealed, and will result in a decision by the Federal Appeals courts. Those courts are ALSO allowed to have conflicting rulings. When this occurs, it is one of the grounds upon which a case can be granted certiorari to the Supreme Court.

Federal Court decisions are bound to the district in which they are ruled upon. They can (and do) reference the decisions in other districts, but they are absolutely not bound by them.

I'm not sure how any of this benefits anyone...or does anything other than make it painfully obvious that this system needs to get fixed. I must say I am a bit confused about why this type of thing would go to a jury trial anyway.

As they say, "Please don't feed the trolls." Applies to internet forums and to patent lawsuits. Only the stakes are a lot higher with the patent trolls.

Maybe if the 800-lb gorillas like Microsoft and Apple get "patent-robbed" for $100M+ more frequently the system will get fixed. We all know nothing in these systems get fixed until the power players get behind it. Witness how swiftly the internet shopping tax bill advanced with Amazon behind it.

Well well well. Microsoft uses the patent law to strong-arm every Android handset maker under the sun to give it a cut, and now it complains when the same hammer is used against them? What goes around, comes around!!!